Reagan Reconsiders Child-care Tax Break

June 25, 1985|By New York Times

WASHINGTON — The Reagan administration is re-examining aspects of its tax revision plan that appear to be disadvantageous to middle-income families in which both parents work, the chief tax official at the Treasury Department said on Monday.

Ronald Pearlman, assistant secretary of the Treasury for tax policy, said in an interview that President Reagan's proposal to alter the tax treatment of child-care expenses would probably be rewritten.

As it stands, the proposed change, which would turn the existing child- care credit into a deduction, would be more unfavorable to families of modest means than administration tax planners had first realized, Pearlman said.

A proposal to abolish the practice of letting two-earner couples deduct part of the wages of one of the spouses will also be re-evaluated, but it is less likely to be changed, Pearlman said.

The tax plan was challenged by influential legislators last week on the ground that many middle-income families would end up owing higher taxes than they would owe under current law.

The strongest attack came from Sen. Bob Packwood, an Oregon Republican and chairman of the Finance Committee, who said the plan would have to be made more favorable to middle-income taxpayers if it were to stand any chance of enactment.

The Treasury two weeks ago sent Congress state-by-state tables showing that in every state a couple with two children taking typical deductions and earning the median family income in that state would be better off under the administration's plan than under the present law.

But the Treasury's tables were based on the premise that such families had only one wage earner. Internal Revenue Service statisics show that two-thirds of taxpayers filing joint returns with incomes between $30,000 and $75,000 a year have two wage-earners.

Subsequent analyses, which counted the two-earner deduction and the child- care allowance, showed that middle-income families in several states would owe higher taxes under the administration's proposals and that those in other states would fare less well than the Treasury's tables indicated.

The president's plan would change the child-care allowance from a credit to a deduction, a change that would be beneficial to upper-income households but detrimental to those with gross incomes of about $40,000 or less.

Under the current law, working couples and single parents with children under age 15 can subtract from the income taxes they owe (take a credit for, in tax jargon) at least 20 percent of expenses for such services as baby- sitting and summer camp up to a maximum of $2,400 a year for one child and $4,800 for two or more children.

In 1982, the last year for which data are available, five million families took advantage of the allowance, and it reduced their taxes by an average of about $300.